Gold’s Glitter Could Begin to Fade Soon
By: Christopher Mistal & Jeffrey A. Hirsch
May 12, 2016
Gold has a seasonal tendency to peak in late January after the holiday season, as jewelry demand starts to decline. Price increases can last into the first part of February, as inventories are being replenished by dealers preparing for retail sales for Valentine’s Day gifts. 
Gold tends to post seasonal bottoms in late June or early July, as demand increases when jewelers again stock up ahead of a the seasonal wedding event in India and also, when investors return from summer vacations. Gold prices are also subject to spikes in demand from the investment community, as a hedge or protection from concerns over inflation or times of economic instability or uncertainties. It is valued in terms of the U.S. dollar, so periods of dollar weakness helps support gold’s value.
In the following chart, various 1-year seasonal patterns have been plotted using continuously-linked front-month gold future prices. Gold’s 2016 year-to-date performance is included for comparison. Gold’s 11-, 21- & 41-year seasonal patterns are all relatively similar throughout the year and fairly closely follow the pattern of an early-year peak, followed by sideways to lower trading toward a June/July low and then a rally to close out the year. However, since trading at its all-time high in August 2011, gold has been in decline and its 5-year seasonal pattern reflects this with an average 5% loss by yearend for the last five years.
[Gold Continuous Contract Daily Bar Chart & 1-Yr Seasonal Pattern]
In Tuesday’s Seasonal Sector Trades Alert, we covered silver’s seasonal tendency to decline from approximately mid-May until the end of June. As one may suspect, gold does indeed offer a similar trade opportunity, but it has not been as successful as silver’s. Shorting an August gold futures contract on or about May 20 and holding until the end of June has been fruitful in 27 of the last 41 years for a success rate of 65.8%. This trade’s best year was 2013 when stocks put up their best yearly performance in more than a decade. This trade has also worked in 8 of the last 10 years.
[May Short Gold Futures Contract – Trade History]
The success of this trade and/or Tuesday’s silver trade will likely depend on the Fed, what it does or does not do with interest rates and ultimately the impact on the U.S. dollar. Traditional jewelry and industrial demand is likely to follow historical patterns but investment demand is the wildcard. Gold is an appealing store of wealth when the U.S. dollar is weakening and gold is now clearly competitive with cash, especially in countries with negative interest rates. Those negative rates are no different than having to pay a storage fee for physical gold or an expense ratio for holding an ETF consisting of gold. 
At best, the U.S. dollar’s trend displayed in the following chart is neutral and at worst it is bearish. The U.S dollar has been in a trading range for about a year having failed to breakout and remain above 100 while managing to stay above 90. However, since the Fed hiked rates last December, the U.S. dollar has made a series of lower lows and lower highs suggesting a new bearish trend is developing.
[U.S. Dollar index Weekly Bar Chart]
This bearish trend is most likely the result of the dovish tone the Fed has taken in recent meetings and the expectation that the Fed will not make another move until much later this year. The assumption that the Fed will not act anytime soon could prove overly optimistic. The Fed has repeatedly expressed its desire to normalize rates and at least half their dual mandate is satisfied. Unemployment is at 5.0%. Inflation could also accelerate now that oil appears to have found stability, up about 75% from its February lows. Other commodities appear to be following suit.
Last December we took a contrarian view of interest rates and the U.S. dollar that ultimately transpired so this gold short trade is worth a shot. There are a few leveraged, inverse gold ETFs and ETNs to trade, but that leverage will only amplify volatility which is likely to result in a less than desirable outcome. Instead a basic short position in SPDR Gold (GLD) will be the path taken. GLD could be shorted on a break down through support at $117.79 or near resistance at $126.72 with confirming negative stochastic, MACD, and relative strength indications. An initial stop loss of $130.00 is suggested. This trade will be tracked in the Almanac Investor ETF Portfolio which will be updated again next week.
GLD chart